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What's Your Fraud IQ?

Although
the required knowledge, expertise, and roles of auditors and fraud
examiners differ, CPAs occasionally find themselves in situations
where evidence of fraud is right in front of them. Without a basic
understanding of some methods for identifying and analyzing
suspicious transactions, unsuspecting accountants might let the red
flags of fraud keep flying. Do you have what it takes to pick up on
the warning signs of fraud? Do you know what to do if you spot
something questionable? Use this quiz to test your knowledge of some
of the techniques that can help detect and analyze potential fraud.

1.
The data analysis technique that involves testing whether, within a
given data set, digits appear in certain positions in the numbers in
the expected proportion is known as __________.

a. Digit
occurrence matching

b. Benford’s
law analysis

c. Correlation analysis

d. One-to-one checking

2.
Lester Van Andel suspects that one of the purchasing agents at Clint
Industries is funneling orders—complete with inflated purchase
prices—to small companies run by his family members in exchange for
kickbacks. Van Andel knows that these vendors’ business filings with
the Secretary of State should contain enough information to help him
confirm the companies’ ownership and thus the conflict of interest.
However, to access the filings with the Secretary of State, he will
need to obtain a subpoena.

a. True

b. False

3. In
an interview situation, which of the following behaviors is often a
sign of deception?

a. Repeating
each question

b. Starting
each answer with “honestly” or “to tell the truth”

c. Answering
each question with another question, such as “Why would I do
something like that?”

d. All
of the above

4.
According to the ACFE’s 2008 Report to the Nation on Occupational
Fraud and Abuse, which of the following is the most common
behavioral red flag exhibited by fraudsters?

a. Divorce
or family problems

b. Unwillingness
to share duties

c. Living
beyond their means

d. Unusually
close association with a vendor or customer

5. If
a desktop computer is believed to contain evidence of a fraud, what
is the first step that should be taken in securing it for analysis?

a. Turning
it off using the shutdown process

b. Unplugging it

c. Sorting
through the files to make a note of where on the hard disk the
pertinent evidence is located

d. Copying
all files on the computer to a portable hard drive

6.
Sherry Elkins, an accounts payable clerk, has been embezzling money
from her employer by manipulating the company’s billing function.
Which of the following data analysis techniques would be helpful in
identifying fraudulent A/P transactions?

a. Identifying
vendors with no contact name

b. Identifying
the least-used vendor accounts

c. Identifying
the most-used vendor accounts

d. All
of the above

7.
While reviewing sales invoices, Michelle Starle, CPA, comes across a
document with some odd markings. Based on several other suspicious
things she’s noticed, her initial hunch is that it has been altered
as part of a fraud scheme. What is the first thing she should do
with the document?

a. Circle
the suspicious writing on it

b. Fold
it, put it in an envelope, and mail it to the police

c. Make
a copy of it and put the original in a folder

d. Paperclip
it to a legitimate invoice for comparison by her supervisor

ANSWERS

1.
(b) Benford’s
law, also called the first-digit law, states that in a population of
multidigit numbers, the first digit of the numbers will be
distributed in a predictable way. For example, the first digit of a
multidigit number is 1 approximately 30% of the time—far more than
the expected frequency of one out of nine. Conversely, the first
digit of a multidigit number is 9 only 4.6% of the time. Many
fraudsters, however, fail to take this nonintuitive pattern into
account when creating false documentation or transactions to cover
their tracks. Some dishonest employees even attempt to be clever by
evenly distributing the digits involved in their concealment
techniques. Therefore, a pattern of numbers—such as invoice numbers
or dollar amounts—whose digits deviate far from the values expected
based on Benford’s law might indicate that not all of the included
numbers are legit.

2.
(b) Most
states require corporations that do business within their
jurisdictions to complete annual filings with the Secretary of
State. Such filings are considered public records; consequently,
access to such records does not necessitate a subpoena or the
permission of the registered company. Additionally, nearly every
state makes the information from such filings available online to
the general public. The information included in such filings varies
from state to state, but generally includes: information on the
company’s owners, directors and executives; the principle business
address; the date of incorporation; and business ID numbers. Similar
filings and information are also frequently available for LLCs. (For
a consolidated listing of the corporate and business filings
available for each state, see llrx.com/columns/roundup29.htm.)

3.
(d) Certain
verbal responses or patterns can offer clues that the individual
providing the responses is under stress; often such signals indicate
that the respondent is trying to hide something. For example, if an
individual repeats the interviewer’s questions, he or she might be
attempting to gain more time to think of what to say. Similarly,
beginning responses with oaths, such as “honestly” or “to tell the
truth,” can be a liar’s way of attempting to add credibility to the
dishonest statement he or she is about to make. Answering questions
with questions—such as “Why would I do something like that?” or
“What makes you think I would know that?”—is another method used to
deflect a question without providing a directly dishonest answer.
While many clues are too subtle to be noticed by anyone other than
trained investigators, being aware of the verbal signs of deception
can only help a CPA in detecting questionable situations. In the
world of accounting and audits, when someone appears stressed in
response to being asked about specific processes or transactions, it
is reasonable to consider what they have to hide and whether it
could be fraud.

4.
(c) In
the ACFE’s 2008 Report to the Nation on Occupational Fraud and
Abuse, 38.6% of the cases reported involved a perpetrator who
was living beyond his or her means, making this the most common
behavioral red flag exhibited by the fraudster. Additionally, 34.1%
of the perpetrators were experiencing known financial difficulties
at the time of their crimes. While these findings certainly do not
mean that all individuals who live beyond their means or experience
financial difficulties will resort to fraud, the fact that these
common threads were woven through more than one-third of reported
fraud cases indicates that certain behavioral
characteristics—particularly if displayed by employees who have
access to company finances—are worth noting. Further, although
divorce or family problems, an unwillingness to share duties, and an
unusually close association with a vendor or customer were less
commonly cited red flags than living beyond one’s means, these
warning signs were present in 17.1%, 18.7% and 15.2% of the reported
fraud cases, respectively. Accountants are generally tasked with
analyzing numbers, controls and transactions, but by expanding their
observations to the people who record the numbers, design and
execute the controls, and carry out the transactions, additional
frauds may be uncovered and losses to companies mitigated.

5.
(b) Analysis
of computer files and structures for investigation and legal
purposes should be left to professional computer forensics experts,
and such an expert should always be consulted before touching the
computer under investigation. However, accountants should be aware
that any desktop computer that is being seized—or that might be
seized at a later date—for an investigation should be unplugged from
the power source rather than turned off using the normal shutdown
process, as there may be data contained within the computer’s hard
drive that would be erased with a system shutdown. Additionally, it
is imperative that the files are left intact and untouched—no
sorting through them or copying them to another location—in order to
maintain the integrity of the data on the computer for purposes of
the forensic examination.

6.
(d) The
billing function is a common target for employee embezzlement, as
that’s where the vast majority of an organization’s cash
disbursements are initiated. Frauds against the billing function
take many forms; luckily, so do the tests that can help detect such
schemes. Queries that identify vendors with no listed contact person
can indicate accounts set up for the sole purpose of submitting
fraudulent invoices to the company for payment. Additionally,
identifying vendors on the extreme ends of the usage spectrum can
illuminate transactions that merit further scrutiny. Transactions
involving a one-time vendor might be legitimate, but they might also
be a sign of a fraudster testing the waters. Likewise, a vendor that
is used disproportionately often might be a sign of a conflict of
interest or kickback scheme. Other common data analysis techniques
that are used to identify fraud against the billing function include
comparing vendor and employee contact information and searching for
matching/similar addresses, phone numbers, and tax ID numbers;
searching for duplicate or consecutive invoice numbers from the same
vendor; and stratifying invoice amounts to identify invoices that
fall just below approval thresholds.

7.
(c) A
document—particularly one with forgeries or fraudulent
alterations—can be an important piece of physical evidence in a
legal case against a fraudster. Often such documents will need to be
analyzed by a forensic document examiner to confirm whether and how
they have been forged, altered or fabricated. Consequently, Starle
should handle the document cautiously, taking care not to fold it,
mark on it, or alter it in any way, so as to not taint any
evidential value the document has. Even placing a paper clip on the
document can change the original document’s condition enough to
affect the forensic analysis. Additionally, most forensic
examinations require the original document, since most photocopies
do not reproduce certain features with sufficient clarity or detail
to allow adequate examination. Therefore, Starle should make a
working copy for purposes of her review and preserve the original
document—preferably in a secure paper folder or sealed envelope to
avoid damage or contamination—for submission to a forensic document examiner.

SCORING

If
you answered seven questions correctly, congratulations. Your
arsenal of antifraud knowledge is well-armed and ready to aid in the
fight against fraudulent conduct. Keep up the good work.

If
you answered five or six questions correctly, you’re on the right
track. Use the resources on this page to continue to build on your
knowledge of fraud detection and investigation.

If
you answered fewer than five questions correctly, you may want to
brush up on your antifraud knowledge. The resources are a good place
to start. Enhancing your understanding of fraud detection and
investigation concepts will help ensure that you have what it takes
to keep fraud from slipping by on your watch.

Andi
McNeal (amcneal@acfe.com) is director
of research for the Association of Certified Fraud Examiners.

To
comment on this article or to suggest an idea for another article,
contact Loanna Overcash, senior editor, at lovercash@aicpa.org or 919-402-4462.

Membership
in the Forensic and Valuation Services (FVS) Section provides you
with access to numerous specialized resources in the forensic and
valuation services discipline areas, including practice guides and
exclusive member discounts for products and events. Go to aicpa.org/FVSto
learn more about the FVS Section or to join go to tinyurl.com/d93r6w.

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